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Euro rises as drop in Treasury yield whacks US dollar

Wed, Dec 05, 2018 - 5:50 AM

London

THE euro rallied above US$1.14 on Tuesday as a fall in US Treasury yields encouraged further selling of the US dollar, with the yen and trade-linked currencies such as the Chinese yuan also racking up strong gains.

Investor jitters about China and the United States' ability to resolve their trade differences did not spread into the foreign exchange market, with emerging market currencies and the Australian and Canadian dollars building on Monday's gains.

The US dollar, measured against a basket of currencies, fell to its weakest since Nov 22. US Treasury yields fell overnight, with two-year yields rising above those of longer-dated five-year notes for the first time in more than a decade. The so-called "inversion" of the yield curve is the first since the beginning of the financial crisis in 2007 and to many investors sounded an alarm about a looming US economic slowdown. Continuing interest rate hikes have sent short-dated yields higher while tepid inflation and slowing economic growth expectations have kept longer-dated yields pinned down.

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The recent weakness in the US dollar comes against the backdrop of a temporary truce in the US-China trade conflict agreed over the weekend, which has bolstered investor confidence in riskier currencies versus the safe-haven greenback. The US dollar fell half a per cent against the offshore yuan to 6.8421 on Tuesday, its weakest level since September. On Monday, the US dollar shed more than one per cent versus the yuan, its steepest fall since Aug 25.

Analysts said that investors were nervous about the trade war truce, with only vague statements from both US President Donald Trump and Chinese leader Xi Jinping. The edgy mood was evident in weakness in stock markets on Tuesday.

The Australian dollar was also further boosted by the broad-based US dollar selling, gaining 0.4 per cent in Asian trade to US$0.7384. The Reserve Bank of Australia kept its policy cash rate unchanged on Tuesday in a widely expected move.

The yen gained 0.8 per cent to 112.74 yen per US dollar and was on course for its biggest one-day rise since July. Emerging market currencies including the Mexican peso and Indian rupee were mostly up against the US dollar on continued relief over Washington and Beijing's trade war cease-fire. REUTERS